Hayekians would argue that both the Japanese lost decade and the recent US housing crash were both caused by massive mis-allocations of capital driven by a variety of government interventions and corrupted price signals (particularly on interest rates). This may be an early signal of a lulu of a bust coming to China, in an story on the high speed rail system in China

With the latest revelations, the shining new emblem of China’s modernization looks more like an example of many of the country’s interlinking problems: top-level corruption, concerns about construction quality and a lack of public input into the planning of large-scale projects.

Questions have also arisen about whether costs and public needs are too often overlooked as the leadership pursues grandiose projects, which some critics say are for vanity or to engender national pride but which are also seen as an effort to pump up growth through massive public works spending.

The Finance Ministry said last week that the Railways Ministry continued to lose money in the first quarter of this year. The ministry’s debt stands at $276 billion, almost all borrowed from Chinese banks.

“They’ve taken on a massive amount of debt to build it,” said Patrick Chovanec, who teaches at Tsinghua University. He said China accelerated construction of the high-speed rail network — including 295 sleek glass-and-marble train stations — as part of the country’s stimulus spending in response to the 2008 global financial crisis.

Zhao Jian, a professor at Beijing Jiaotong University and a longtime critic of high-speed rail, said he worries that the cost of the project might have created a hidden debt bomb that threatens China’s banking system.

“In China, we will have a debt crisis — a high-speed rail debt crisis,” he said. “I think it is more serious than your subprime mortgage crisis. You can always leave a house or use it. The rail system is there. It’s a burden. You must operate the rail system, and when you operate it, the cost is very high.”

It should be noted that this is the system that has been lauded by folks from Thomas Friedman to Barack Obama as something we should emulate in the US. By the way, this problem identified in China is in fact endemic to the US -- the cost overruns in every rail system. In the US, this probably has less to do with outright individual corruption (i.e. the stealing of money for personal gain) but more common political corruption, in the form of purposefully underestimating costs to get public approval, knowing that when inevitable overruns appear, it will be too late to stop the project.

Part of the cost problem has been that each segment of the system has been far more expensive to build than initially estimated, which many trace directly to the alleged corruption being uncovered, including a flawed bidding process.

I wrote earlier on high speed rail as triumphalism rather than real investment here. Why the US actually has the best rail network in the world is here (hint: from an energy, pollution, and congestion standpoint, the best thing to put on rails is freight rather than passengers, and the US does that better than China or Europe, by far)